Despite a long-term NAND flash memory supply that Apple secured in 2005, we now learn that the company recently ordered an additional half a billion dollars worth of NAND chips from Toshiba. So, why more chips if not to build a new device, like a tablet?

Apple has recently placed an order for NAND chips with Toshiba, paid upfront, the company told investors during the third quarter earnings call Tuesday. Although Apple refused to release specifics of the agreement, the Cupertino company did say it placed the $500 million order in the September quarter.

The additional flash memory could end up in iPhone, iPod touch, iPod nano, and iPod shuffle units, but also in a rumored Mac tablet. Apple conveniently revealed the new deal just as its 2005 multi-vendor NAND supply agreement is set to expire in less than year and a half.

Timothy Cook, Apple’s chief of operations who acted as an interim CEO during Jobs’ absence, shared few details with investors on the conference call Tuesday.

“We view flash as a very key component for us,” he said, “because as you know we use it so many of our products.”

Analysts pressed Cook whether Apple will get NAND flash memory exclusively from Toshiba or if possible deals with other vendors loom on the horizon. Cook said Apple might do business with others if offered the “right terms.”

“I wouldn’t close that door,” Cook noted. “We are always open to doing additional deals, with the right terms and conditions.”

Christian’s opinion

The timing and terms of the new deal strongly indicate a tablet release within a year. Apple had prepaid $1.25 billion in the 2005 multi-vendor deal securing the long-term supply of NAND flash memory through 2010. While specifics of the agreement remain unknown, one could safely assume that ordered quantities were derived from Apple’s iPod and iPhone growth projections at the time. While it’s quite possible that Apple underestimated the market, ordering more flash memory to meet the demand for iPhones and iPods, it’s indicative that the company cut the Toshiba deal in the September quarter (that’s why it didn’t show up in the just-released June quarter earnings), conveniently in time for the supposed late 2009/early 2010 tablet launch predicted by some analysts.

While Apple said it only uses three percent of the global flash memory output, its flash-based portable devices make up for a much larger portion of all flash-based gadgets on the market. Being a key buyer, Apple gets preferential treatment from NAND chip makers. It wasn’t always like this, though. Prior to iPod, Apple wasn’t even on the NAND market map. As the music player sales started taking off, Apple’s NAND orders began picking up. Volatile NAND prices and several shortages convinced Apple to go after a long-term deal that required huge upfront payment.

The 2005 deal has been beneficial to Apple in several ways. Sheer scale of the order guaranteed Apple buying prices that its rivals could only dream off. As a result, their toys were more expensive than Apple’s since they were forced into buying a pricier NAND. Vendors who challenged the Cupertino firm on price did so at the expense of their already thin margins, profiting less in the process.

This is how Apple slaughtered iPod challengers: When rival music and media players got too close, matching the iPod in both features and price, Apple prepaid $1.25 billion to Hynix, Intel, Micron, Samsung Electronics, and Toshiba, securing the long-term NAND flash memory supply. Rival vendors were unable to match Apple’s order neither in quantity nor the negotiated price. In addition, as a result of this, Apple’s rivals remain prone to shortages and price changes due to seasonal trends and artificial shortages that the Apple deal created on the market. The 2005 NAND deal enabled Apple to build more capacious and cheaper iPod models, driving rivals crazy.

Reader Comments

Ken

You know, I am a mac guy now, but I gotta disagree with you on this one. Just because Apple bought such a large amount at one time actually could mean they were cheap prices then, but flash prices have come down significantly since 2005 so many other OEM’s look really good for not negotiating for a one time deal.